Hearings and Business Meetings

Oct182005

SD-366Energy Committee Hearing Room10:00 AM

Mr. Larry Downes

Senate Energy and Natural Resources CommitteeOctober 18, 2005

Statement of Laurence M. DownesChairman, American Gas Association

Executive Summary

The American Gas Association (AGA) represents the nation’s local gas utilities. AGA member companies acquire gas supply for, and distribute it to, their residential and commercial customers. Energy is the lifeblood of our economy and natural gas supplies about one-fourth of this country’s energy. Natural gas also is America’s most popular home-heating fuel, heating 52 percent of America’s homes.

By law the local gas utility cannot make a profit on the cost of natural gas, it is required to pass through to customers what it pays for the natural gas commodity – without any mark-up. The Department of Energy’s Energy Information Administration has projected that natural gas households will see their winter fuel bills rise from about 30 percent to about 67percent, depending on the winter weather. Clearly, the natural gas prices that are projected for this winter in the wake of Hurricanes Katrina and Rita will be a tremendous burden to our customers.

Our role as a lifeline business infuses the natural gas utility with a mandate to serve our customers safely and reliably – we do not fail in this regard. We build a supply portfolio that rests on a foundation of natural gas placed in storage during the summer months, well in advance of winter cold, when the prices generally are lower. To this we add a portfolio of natural gas supply contracts with varying terms and prices, and we are, as a whole, increasingly hedging our supply portfolio to promote some degree of price stability.

Natural gas distribution utilities also help our customers help themselves. To this end, customer education is critical. Customers can avail themselves of levelized billing plans and seek help to weatherize their homes and implement other energy efficiency measures. For those who must decide between paying their heating bills or paying their medical bills, the Low Income Home Energy Assistance Program (LIHEAP) has been designed. Funds must be accessed and accessible. Congress must do its part to see that the fully authorized level for LIHEAP of $5.1 billion is funded. Emergency appropriations of an additional $1 billion are also needed.

All of these tools will help this winter. But we cannot as a nation forever mask increasing natural gas prices with demand measures targeted at the home heating consumer alone. We must begin to take steps to diversify fuels for electricity generation. And we must take action to increase natural gas supply. Without these measures, the upward spiral will continue, and we will, winter after winter, face the same scenario – where one fall hurricane, or one winter cold snap can tilt the supply/demand balance against the consumer. TESTIMONY

Thank you for the opportunity to testify before this committee again. My name is Larry Downes, and I am Chairman and CEO of New Jersey Resources, which operates a natural gas utility in New Jersey that provides service to more than 455,000 customers. I am also the chairman of the American Gas Association (AGA), which represents 195 local energy utility companies that deliver natural gas to more than 56 million homes, businesses and industries throughout the United States.

Energy is the lifeblood of our economy and natural gas supplies about one-fourth of this country’s energy. Natural gas also is America’s most popular home-heating fuel, heating 52% of America’s homes. As the purveyor of this home-heating fuel, natural gas utilities are a lifeline business – it is a responsibility we take seriously and, as you will see, it guides our actions.

Given the recent run up in natural gas prices in the wake of the warmer than normal summer and the Katrina and Rita hurricanes, this winter natural gas customers will likely face significantly higher energy bills. Local natural gas utilities as a whole have been consumed by planning for the winter heating season and seeking means to ease the burden that high gas prices will place on our customers.

Accordingly, our focus as a national organization is to pursue policies that will help mitigate the high cost of natural gas for our customers this winter and, longer term, increase supply. It is shocking to think that the $13 prices projected in the American Gas Foundation, “Natural Gas Outlook to 2020,” published in February of this year, have already been exceeded for short periods. That study concluded that if public policy makers and industry decision makers did not immediately address critical issues that will have a significant impact on the availability and price of natural gas, such as diversifying our electric generating mix and increasing access to domestic supplies, then prices could go as high as $13 by 2020. No one imagined that a mere 7 months later those prices would already be a reality. These higher natural gas prices will lead to much higher bills for consumers.

Higher bills are bad for customers, bad for the economy and bad for the natural gas utilities that the American Gas Association represents. More than 63 million Americans rely upon natural gas to heat their homes – unexpectedly high prices are a serious drain on their pocketbooks. High prices also put our industrial sector at a distinct competitive disadvantage, cause plant closings and idle workers.

Most observers quickly understand why higher prices are bad for customers and the economy but are not aware why they are bad for natural gas distribution utilities. By law, natural gas utilities are not allowed to mark-up the price of natural gas and must sell the gas to consumers at exactly the same price they pay for it. Natural gas distribution utilities make their money by delivering natural to our customers. Higher natural gas prices mean that our customers will purchase less natural gas. So natural gas utilities want what their customers – lower natural gas prices and reliable natural gas supply.

Last week the Department of Energy’s Energy Information Administration (EIA) issued its Short-Term Energy Outlook and Winter Fuels Outlook (October 12, 2005). The American Gas Association does not issue its own natural gas price projections, so in my testimony I will be discussing the EIA projected prices. As has been widely reported, EIA projects that the average natural gas household’s winter fuel expenditures will be 47.6 percent. Don’t let the decimal point fool you. If history is any guide, this EIA predicted percentage surely will change next month both to the right and the left of the decimal point. It is important to remember, as EIA carefully notes, that the EIA projections are based on modeling results that depend on assumptions regarding some critical variables. A significant assumption is that there will be a “medium recovery” of energy operations in the Gulf of Mexico. In other words, EIA does not assume either a best-case or worst-case scenario in projecting the recovery of natural gas production, gas processing and pipeline facilities in the Gulf. Another significant assumption is that the winter weather will be normal. A “normal” winter means weather somewhat colder than most parts of the US have seen in recent years. What if we do not have a normal winter? EIA projects that a ten percent warmer than normal winter would cause average residential natural gas prices to rise 29.8 percent, while a ten percent colder than normal winter would lead to a 67.3 percent price increase. This is quite a price range without considering best-case or worst-case Gulf of Mexico recovery scenarios. So that is what we are facing nationally – significantly higher natural gas prices in the best of cases and extraordinarily higher prices in the worst of cases.

What are natural gas distribution utilities doing to help their customers this winter? Natural gas utilities are doing what we always do – that which is necessary to serve our customers reliably this winter. That means that we are pursuing purchasing strategies that, while tried and true, have also evolved over the past five years with ever-rising natural gas prices. It is a building block process that begins months ahead of the winter heating season as utilities begin purchasing natural gas during the summer months and putting it into underground storage. Usually summer and early fall natural gas prices are lower than winter prices and purchasing storage gas in the summer and early fall provides a natural hedge.

On top of the foundation block of storage, natural gas utilities layer other supply and transportation services. Companies build and manage a portfolio of supply, storage and transportation services, which may include a diverse set of contractual arrangements to meet anticipated peak-day and peak-month gas requirements.

Layered on top of that is an increasing use of financial tools to hedge natural gas costs and promote some degree of price stability. Financial hedging tools may include options, fixed-price contracts, swaps, and futures. These hedging tools are helpful in reducing price volatility, and while natural gas distribution utilities have grown increasingly savvy in their use of these tools over the past few years, they still do not always guarantee a lower natural gas price, nor are they designed to, quite frankly. Lower prices and price stability can sometimes be competing objectives.

Natural gas distribution utilities also must help our customers help themselves. To this end, customer education is critical for a number of reasons. First, customers need to be aware of higher natural gas prices to have an opportunity to take action today to reduce this winter’s bills. That is why the American Gas Association and individual natural gas distribution utilities are working to communicate to customers regarding the anticipated higher winter bills and to offer consumers some tools to protect themselves.

One important tool is the use of budget or levelized bill plans that allow utility customers to spread out their natural gas bills so that they pay about the same amount each month year round. Enrollees in fixed bill programs are charged the same total bill each month for 11 months, regardless of weather extremes and unpredictable commodity prices. Usually there is an adjustment during the twelfth month to reflect differences in actual versus projected costs.

Another important tool is assisting customers to take steps to increase their homes’ energy efficiency and better conserve energy. Energy efficiency and conservation can do much to reduce individual energy consumption and lower customer bills. Indeed, one recent study indicated that aggressive energy efficiency measures could reduce natural gas prices by up to 25 percent. While analysts may quarrel with the likely impact of an increased application of energy efficiency measures on natural gas prices, we know that appropriate customer energy efficiency measures can benefit customers and these benefits will be more immediate in today’s high-priced environment.

The American Gas Association thanks this committee for its work in encouraging greater consumer energy efficiency and AGA and its members will continue to encourage improved customer energy efficiency and conservation to help reduce the sting of higher natural gas prices.

Another significant utility effort to help customers struggling to pay high natural gas bills is found in utility programs that provide low-income customer assistance. Each year utility programs and rate structures provide about $1.7 billion in low-income customer assistance. These programs are designed to augment the federal government’s Low Income Home Energy Assistance Program (LIHEAP), which in recent years has been funded at around $2 billion per year. Much of the utility low-income assistance comes in the form of rate assistance, which may involve reduced rates for low-income households, waivers of fees, and arrearage forgiveness. Other utility programs include energy efficiency and weatherization programs that help reduce customer natural gas consumption.

What we seek from all of these approaches is to flatten out the highest peak of natural gas prices and somewhat dampen the impact on customers of high and volatile natural gas prices. In the long term, however, these tools cannot forever mask the impact of higher natural gas prices on our customers. Other actions are necessary. They were necessary five years ago, they were necessary last year, and, even with enactment of the Energy Policy Act, they remain necessary today.

Accordingly, AGA recommends the following multifaceted actions be taken to address both ends of the delivery chain – supply and demand.

First and foremost, LIHEAP funding should be increased to the full $5.1 billion appropriated level and an additional emergency appropriation of $1 billion should be made. Without an increase in funding, the purchasing power of LIHEAP could be reduced by up to 50 % this winter. The expected rise in home energy costs hits low- and fixed-income individuals particularly hard. The National Energy Assistance Directors' Association (NEADA) just released its second annual survey of the effect of rising energy costs on poor families. Among the study's findings: 32 percent of families in the survey sacrificed medical care; 24 percent failed to make a rent or mortgage payment; 20 percent went without food for at least a day; and 44 percent said that they skipped paying or paid less than their full home energy bill in the past year. Furthermore, the number of households receiving LIHEAP assistance has increased from about 4.2 million in FY 2002 to more than 5 million this year, the highest level in a decade. LIHEAP applications are expected to increase significantly this winter. The nation should help customers who will be hit hardest by energy price increases for home heating and cooling.

Natural gas supplies must be increased. AGA supports policies that would increase the supply of natural gas in environmentally responsible ways. Demand responses can only go so far toward the goal of lower natural gas prices. And while a demand response will help us through this winter, long-term Increasing supplies of natural gas must occur if we are to reduce customers’ bills meaningfully. Accordingly, Congress should support appropriate incentives and legislative changes that would increase the production of natural gas. These priorities have not changed since I testified before this Committee in January of this year, so let me briefly reiterate a few of the most important access issues:

• Opening restricted off-shore areas for the environmentally responsible production of natural gas;• Providing adequate funding and staff for the federal offices principally involved in the issuance of permits for natural gas and production;• Further expanding and expediting procedures for producers to access lands and production areas; and• Taking steps to increase the U.S. capacity to receive liquid natural gas (LNG) shipments.

Energy efficiency programs should be supported that encourage the most efficient utilization of all energy forms through the matching of each energy task with the most appropriate fuel (e.g., running computers with electricity and heating homes and businesses with natural gas). Additionally, incentives should be incorporated for more efficient energy use through tax credits for the purchase of energy efficient appliances and the construction of energy-efficient homes and commercial buildings. Congress should further accelerate the effective date of energy efficiency tax incentives in the Energy Policy Act and fund energy awareness programs at the Department of Energy.

Diversity should be the goal for fuels for new electricity generation facilities. In recent years, due to its lesser impact on the environment, natural gas has been the dominant fuel for new electricity generation. Electricity generation remains the fastest growing sector of natural gas demand. This increase in demand has occurred while production has remained stable, driving prices higher. AGA supports the direct use of natural gas and encourages electricity generators to seek greater fuel diversity, such as clean coal, nuclear, alternative and renewable fuels. AGA urges Congress to provide incentives for and reduce regulatory barriers to electricity generation facilities that use clean coal, nuclear energy and alternative and renewable fuels.

Consumer education should be the goal not just of natural gas distribution utilities but of all policy makers. We in the utility sector will continue our efforts to educate our customers – we urge Congress to also educate our customers, their constituents, so that every avenue to the customer is blanketed with information that will ease the potential cost burden that will be imposed this winter by natural gas bills.

CONCLUSION

For the past five years the natural gas distribution utility and our customers have been operating in challenging times – this winter will be no exception. While natural gas customers can do their part by embracing energy efficiency solutions, policy makers in Washington must do their part to balance supply and demand.

FEDERAL ENERGY PRIORITIES OF NATURAL GAS UTILITIES

The Energy Policy Act of 2005 was a good first step in meeting the nation's long-term energy needs. However, the federal government has not adequately addressed the need for more and diverse energy supplies, or more relief for those most at risk. Urgent action is needed now to reduce the economic burden of record-high energy costs on consumers. The federal government should take action to:• Increase the funding for the Low Income Home Energy Assistance Program (LIHEAP)• Increase natural gas supply for consumers• Diversify the portfolio of fuels for electricity generation • Support energy efficiency programs

Increase The Funding for Low Income Energy Assistance Program (LIHEAP)The nation should help customers who are hit hardest by the recent dramatic energy price increases for home heating and cooling by increasing the appropriation for LIHEAP. AGA urges Congress to:• Increase the annual LIHEAP appropriation to $5.1 billion • Appropriate $1 billion for emergency assistance

Increase Natural Gas Supply AGA supports policies that would increase the supply of natural gas in environmentally responsible ways because additional supplies typically mean energy lower bills for consumers. AGA urges the Congress to:• Open restricted off-shore areas for the environmentally responsible production of natural gas, including in the eastern Gulf of Mexico and on the outer continental shelf (OCS)• Provide adequate funding and staffing for the federal offices principally involved in the issuance of permits for natural gas exploration and production• Reform the National Environmental Protection Act (NEPA) process so that it works to protect the environment and allows for responsible natural gas production• Adopt streamlined and expedited procedures for producers to access lands and ensure that year-round production can occur in the intermountain west• Take steps to increase the U.S. capacity to receive liquefied natural gas (LNG) shipments• Codify into law Executive Order 13211 and a Federal Office of Energy Project Coordination

Diversify The Fuel Portfolio for Electricity Generation FacilitiesNatural gas is now the predominant choice as a primary fuel for new electricity generation. Electricity generation has been the fastest growing sector of natural gas demand. This increase in demand has not been matched by production increases, driving prices higher for all consumers. AGA supports the direct use of natural gas and encourages electricity generators to seek greater fuel diversity. AGA urges Congress to:• Provide incentives for, and reduce regulatory barriers to, electricity generation facilities that use clean coal, nuclear energy, and alternative and renewable fuels, and dual-fuel capability

Support Energy Efficiency Programs AGA supports policies that encourage the most efficient utilization of all energy forms through the matching of each energy task with the most appropriate fuel (e.g. running computers with electricity and heating homes and businesses with natural gas). AGA urges Congress to: • Accelerate the effective date of the energy efficiency tax incentives in the Energy Policy Act • Fund energy awareness effort by DOE